Big upheavals often mean big opportunities, and COVID-19 is certainly a world-changing event. Could the post-pandemic market conditions spark an opportunity for a local player to grow into a major force in the MENA insurance sector?
The COVID-19 pandemic has knocked everyone off course in the first half of this year. Six months ago, all seemed very promising, but none of us, however good our visual acuity, saw that 2020 would rewrite the rules of life. While we all work out how to adapt, we should remember that life goes on and that the insurance sector, like all other aspects of life, will adapt too.
It is premature to make sweeping judgements, but the insurance sector seems to be weathering the storm very well. Other sectors like retail, tourism, aviation, travel and hospitality have been devastated, but from my view-point in Dubai, insurance so far has kept going.
There has not been much new business, but insurers appear to have hung on to their existing risks. Perhaps the second half of the year would be hit by the effects of the economic downturn in the other sectors. The storm that has broken over most economies is still brewing for insurance. So far, there have been unexpected benefits for the industry.
People in the MENA region, as elsewhere, have stayed away from hospitals and clinics, mainly on the advice of the health authorities, who have been keen to free up facilities to be able to deal with the pandemic. Medical claims have accordingly been dramatically reduced.
In the UAE, the government promised to bear all costs incurred by COVID-19 patients, whether they had medical insurance or not. This has saved insurers a lot of money, and they are considering how to pass some of this back to policyholders, for example, by giving them free protection for a few months. Likewise with motor insurance, there has been a dramatic fall-off in car use and in miles driven. Motor claims have also fallen dramatically, and insurers in Saudi Arabia and other GCC countries are looking at ways of recompensing policyholders by offering lower premiums or extended insurance periods.
These are however competitive markets and it may not take long for previous normality to reassert itself. There is likely, for example, to be a backlog of medical treatments which will need urgent attention, when people feel more confident about visiting a clinic. Motor vehicle use is picking up fast. Schools and shops are reopening; people will soon start to travel again. Most countries are preparing to reopen their economies. This brief honeymoon period for local insurers may soon be over and the previous upward trend for premiums may resume.
Wider effect of COVID-19
Over the whole insurance industry hangs the wider effect of COVID-19. The big international insurers have mostly assumed that their policies did not cover infectious diseases. Huge business interruption (BI) claims are outstanding and the Financial Conduct Authority in London, at the time of writing, is preparing to take a number of insurers, including Hiscox and RSA, to the High Court in order to get a ruling on how much of the bill for COVID-19 the industry should pick up.
Insurance normally covers event cancellation, travel claims and damage to buildings from fire or flood. What has yet to be determined is whether BI covers losses inflicted by lockdowns, especially if these have been imposed by governments, and are not property-related. It is no exaggeration that if the judgements go against the insurers, and there are many similar cases in preparation in the US too, this could bankrupt the whole industry. Lloyd’s have forecast that if insurers have to pay up, the losses could exceed $100bn in the London market alone.
There will certainly be a lot of negotiation over the wording affecting material damage and BI, assuming that Armageddon does not befall the industry in the courts. Many major insurers, like AXA and Helvetia, have declared that negotiation is the best way forward. There will be big changes to the facultative and treaty markets before the sector settles down again. Big upheavals often mean big opportunities, and COVID-19 is certainly a world-changing event.
There are other aspects of the COVID-19 crisis which require urgent action. What happens to building insurance if most of the staff are not there? How are companies’ liabilities affected if most staff are at home? Are their data being handled properly? We have heard of a significant rise in cyber crime, like ransomware attacks, as a result of the uncertainty caused by the pandemic. Companies are already buying more cyber insurance. New ways will rapidly be found to deal with the changes required in managing these risks, including the big one: infectious diseases.
The potential of regional players
One might have imagined that a local insurer in MENA might have grown into a major force in the regional insurance market, perhaps an Iraqi, Saudi or Egyptian company, drawing on their relatively long insurance traditions. Gulf Insurance Group (GIG) which was founded in Kuwait in 1962, is a case in point. It operates in about a dozen states, including Egypt, Saudi Arabia and Turkey, but has never become a major regional player, though it has ambitions to do so.
Two other examples, both Bahrain-based, are ARIG, which was established in 1980 and Trust Re which began not long after. Both have tried to expand regionally – they were once among the largest reinsurers in the Gulf, taking advantage of Bahrain’s role in the 1980s as the main Gulf financial centre, but more recently they have found the going very hard. The former has now ceased all reinsurance operations and the latter is being restructured. Other companies that operate across borders in the region, like AXA and RSA, are European-based.
Perhaps the origins of most local insurers tend to keep them tied to their national or family roots. They prefer to write local rather than international business. Perhaps they lack the capability to operate as international reinsurers – the deep pools of experience in underwriting major risks lie in larger markets in Europe, the US and elsewhere. It is not a question of money, since there is plenty of capital available.
It is rather that regional insurers seem not to have the skills required to build big businesses, create the capacity and profit needed to expand, and overcome high local expenses. It has to be admitted that the relatively small population of the MENA region, the widespread poverty, the modest amount of business overall, and the generally poor level of governance, with some honourable exceptions, militate against big investments in the insurance sector. We are of course in a downswing at the moment, what with COVID-19 and the contraction of economic activity; when the pendulum swings back again, the insurance industry will pick up as it has before.
Over the years, several states have set up reinsurers with the aim of taking a greater share of the local market. Some like Kuwait Re and Saudi Re, and the North African ones, are surviving, though typically they take years to break even. Others have fallen by the wayside. At this moment, the model of setting up more regional players in the reinsurance market is not viable – there is not enough business for them to write. A further point is that the industry is increasingly cost-driven. Modern technology is providing quick and cheap online solutions to the insurance world. COVID-19 will help to speed up the change to a more international business model.
Another hurdle for many states in the region is that they lack enough trained locals to build a broad insurance industry. Governments should certainly put more effort into making insurance an attractive career. Iraq, three or four decades ago, probably had the best trained insurance cadre in the Arab world, which largely left the country for political reasons, to the benefit of several other countries, particularly the UAE. MENA states should learn from that – the greatest need in insurance is to develop the local talent and foster the skills required to build a broad-based regional industry.
Bumpy ride ahead
The next few months are going to be a bumpy ride, as we learn to live with the virus. We should have been better prepared for COVID-19, which several scientists anticipated. I recommend that everyone watch the film ‘Contagion’, released in 2011, which predicts with scientific accuracy the way the virus was born and spread and its effects on the world’s population.
Once the insurance industry has mastered this pandemic and written the right formulae to cover infectious diseases, we will be better placed to deal with the next pandemic, which we devoutly hope will be a long time coming. The changes that COVID-19 is forcing on us all could provide the spur to building a modern insurance sector in the MENA region. M